Audit Program Week Five Team Assignment Audit Program II Rachel Ramos, Renee Williams, Dale Cornn, Branden

Klink, & Gloria Ochoa Accounting 492 Robert Hinske August 14, 2006

1

Audit Program Week Five Team Homework Audit Memo Kudler Fine Foods Planning Memorandum Year Ended December 31, 2003 To: Robert Hinske, Engagement Partner From: Gloria Ochoa, Rachel Ramos, Dale Cornn, Renee Williams and Branden Klink The purpose of this review is to design the attached internal control questionnaire and audit program for the current year’s audit of the financial statements, with respect to the company’s payroll. Internal Control Questionnaire The purpose of the internal control questionnaire is to help assess the level of control surrounding the payroll process. There are not any specific weaknesses that we have documented at this time; however the questionnaire will help reveal weaknesses that are not always available to the naked eye. Audit Program

2

The audit program has been designed to test the controls over the payroll function and to provide substantive tests of the account balances. During this audit we will use statistical sampling for testing of controls, substantive tests of account balances and the application of analytical procedures, all of which are addressed in the audit program. Objectives We have completed the audit of the payroll cycle for Kudler Fine Foods on behalf of their audit committee and the Board of Directors. Our payroll cycle audit included three main objectives: (1) to determine that payroll disbursements were made for work authorized and performed; (2) to verify that payroll, including withholdings and deductions, is computed using rates and other factors in accordance with federal salary schedules and applicable laws; and (3) to ensure that payroll expense and related liabilities are recorded correctly as to amount, period and adequate disclosure. The period of our test data was from December 31, 2005 through June 30, 2006. Our payroll cycle audit did not constitute a certified audit of any financial statements prepared by Kudler Fine Foods. Therefore, no opinion was given on any financial statements. Tests of controls Testing for control is an important tool in an audit. In the onset of an audit, it is important to assess the risks of internal control within the company. We need to inquire what internal controls the company has and inquire as to whether or not those internal control techniques are being followed as prescribed by management. With this in mind, we decided to make inquires on the following areas. The first area for review is the company’s policies and procedures. This will show what approval processes are in place within the payroll department, if payroll

Audit Program 3 personnel are knowledgeable, and if the segregation of duties is specified. Another area of testing is reviewing who is authorized to have access to the computer system and their levels of authorization. A third area of review is payroll documents. As an audit team we must be able to trace these source documents starting at time sheets to payroll accounting procedures, to payroll distribution, to cash disbursements, and then back to the original time sheet. In going through these procedures, we are able to make an initial risk assessment, develop strategies, and proceed further into our actual audit testing. Substantive tests of transactions Substantive test of transactions are required in order to verify processed payments. The audit team will confirm that transactions made in payroll processing follow the guidelines of the company. The audit team will investigate the employee time cards for accuracy, validity and for proper authorization for duties and hours worked. The time cards will also be used to determine whether payroll disbursements have been properly calculated, including calculation and payment of payroll taxes and deductions. These deductions are significant to both the employer and employee, so these numbers will be verified by sampling pay vouchers using the statistical sampling method as outlined in our sampling outline. This will allow the audit team to determine the allowable risk of the sample failing to detect a material misstatement and the tolerable misstatement. Electronic funds transfers (EFT) will be validated to ensure that vendors, customers, and banks involved in this process have sufficient controls built into their portion of the process. This would include comparison of the payments made from the vendor, banks, etc. with information in the EFT journal. Analytical procedures In conducting our audit of risk assessment we chose to investigate the training of the accounting/payroll staff. The client must prove they operate in accordance with all the reporting agencies and requirements, so proper training is a must. There has to be correct comprehensive accounting methods used since the employer and employees are counting on the payroll function to properly account for and pay all of their payroll deductions and taxes. In addition to the abilities of the accounting staff, each employee should be authorized to conduct all of their duties. We will test the payroll with some analytical procedures that we believe will bring to light any weaknesses in their payroll accounting. By conducting both investigations we are looking to see if the accounting/payroll staff of the company is both knowledgeable and certified to conduct their normal workings with the company. Substantive tests of account balances In choosing steps to perform substantive tests of account balances, the auditor must consider what substantive tests will produce the most accurate results for dollar errors that could affect the accuracy of the account balances. Although the payroll process for Kudler is seemingly secure, we prefer to rely heavily on substantive tests of detail in which we will select a sample of items from the major payroll related accounts and find hard evidence in support of these items being recorded properly. This process will allow for a higher level of assurance that account balances and underlying classes of transactions do not contain any material misstatements. For Kudler, the audit team has specific areas of concern, which include whether or not salaries, wages and withholdings are properly recorded and supported in the payroll system and whether or not the

Audit Program 4 ending balance reported for Accrued Payroll and Benefits is fairly stated. We will be following the full paper trail in order to validate each item sampled, which will entail going back to original pay vouchers and journal entries to get the full picture for each item. Sampling detail sheet

Audit Program Internal Control Questionnaire

5

Audit Program Question Control Environment 1. Is a special payroll bank account used? 2. Is the payroll bank account reconciled by someone who does not prepare, sign or deliver paychecks? 3. Are there adequate segregation of duties in approving time records, overtime and vacations? 4. Are payroll department personnel rotated in their duties? 5. Are payroll department personnel required to take vacations? 6. Are payroll department personnel bonded? 7. Is there a timekeeping department (function) independent of the payroll department? 8. Are authorizations for deductions that have been signed by the employees on file (FICA withholding, medical withholding, federal and state income tax withholding, health insurance premium deductions, medical and childcare flexible spending deductions, and 401(K) deductions, etc.)? 9. Is access of personnel files restricted to specific employees? 10. Are changes made to payroll related information verified by authorized personnel? Risk Assessment 1. What training is provided to accounting to accounting staff to ensure that they have an understanding of the payroll process? 2. What training is provided to accounting staff to insure that they have an understanding of the accounting for payroll? Yes/No Comments

6

Audit Program Question Control Activities 1. Are timesheets being verified by management? 2. Are personnel comparing time records to payroll? 3. Are payroll rates (salary, federal tax rates, state tax rates, FICA rates, etc) being processed accordingly in the system? 4. Do payroll personnel approve bank wire transfers for payment of federal taxes, state taxes, FICA rates, etc? 5. Are employees required to sign for receipt of non EFT payroll checks? 6. Is there a back-up for payroll personnel? 7. Have procedures been established to record the usage of employees benefit time? 8. Are attendance records reviewed by management, so that excessive absences are reviewed? Information Systems and Communications 1. Who has passwords to access the payroll processing system? 2. Is there an audit trail function within the payroll processing system? Is it kept turned on? 3. Do training policies communicate roles and responsibilities to the appropriate accounting employees in regards to payroll processing? Yes/No Comments

7

Question 4. Does the payroll system interface with any system other than the financial system? If yes, is that interface manual or electronic? 5. Is there a system of verification of allocation of expenses that relates to payroll? 6. Is there a list of authorized personnel who can call in to Intuit to process payroll and make payroll changes (salaries, deductions, etc.)? 7. Is there a back-up for all employee files? Monitoring 1. If there are discrepancies, are the issues handled and resolved by competent employees? 2. Are payrolls audited periodically by internal auditors? 3. Is the accuracy, as it relates to the payroll company’s processing, verified upon receipt of the actual payroll? 4. Are quarterly tax reports reviewed for accuracy against the accounting system data? 5. Are the bank statements reconciled against payroll documentation from Intuit?

Audit Program Yes/No Comments

8

Audit Program Audit Program

9

Audit Program Audit Objectives Audit Procedures for Consideration A. To determine that payroll disbursements were for work authored and performed. B. To verify that payroll, including withholdings and deductions, is computed using rates and other factors in accordance with Federal salary schedules and applicable laws. C. To ensure that payroll expense and related liabilities are recorded correctly as to amount, period and disclosures are adequate. Test of Controls 1. Review policies and procedures for payroll data entry for completeness and usefulness. 2. Inquire of personnel about procedures. 3. Determine which employees are responsible for input of data, and ensure adequate segregation of duties. 4. Obtain and review signed confidentiality statements for all employees who are involved in a payroll process to ensure that an understanding of confidentiality exists. 5. Verify that only authorized access to system software programs and data are granted. 5(A). Access to personnel files is restricted. 5(B). Access to payroll files is restricted. Performed By Work Paper Index

10

Date Completed

Audit Objectives

Audit Procedures for Consideration 5(C). Access to QuickBooks program is restricted. 6. Review employee changes to ensure changes were accurate and made in a timely manner and approved by supervisors. 7. Obtain and verify all reports are utilized to help monitor payroll transactions (budget to actual, error/audit reports). 8. Review payroll registers and summaries to ensure supervisors have reviewed and approved prior to pay distribution. 9. Examine cancelled payroll vouchers for completeness and validity; compare to the payroll register. 10. Trace vouchers and labor distributions (coding) to GL and: (a) from/to payroll subsidiary records, and (b) from/to personnel records. 11. Verify for authorization for payroll amounts and for the physical distribution of signed checks. 12. Verify the consistency and integration of the payroll procedures with cash audit and accounts

Performed By

Audit Program 11 Work Paper Date Index Completed

Audit Objectives

Audit Procedures for Consideration payable audit. SUBSTANTIVE TEST OF TRANSACTIONS 1. Verify time cards for legitimate work hours. 2. Verify check payments made to each employee. 3. Verify deduction amounts subtracted from each employee’s check. 3(A). FICA. 3(B). State tax. 3(C). Health insurance. 3(D). Life insurance. 3(E). Pension. 3(F). Allotments (charity, etc). 4. Verify electronics funds transfers (EFT) are processed accordingly. 4(A). From the company’s regular check account to the dedicated payroll checking account. 4(B). The employee’s financial institutions via an ACH file. 4(C). Administrating the flexible spending and

Performed By

Audit Program 12 Work Paper Date Index Completed

401(K) accounts. 4(D). The federal and state taxing authorities.

Audit Objectives

Audit Procedures for Consideration 4(E). Pay voucher printing software application. 5. Verify ETF transfers were journalized. ANALYTICAL PROCEDURES 1. Compare the number of employees that work from each day to the master file of employees to make sure there are no differences. 2. Perform Analytical procedures to the relationship of employee’s wages to the hours that was worked. Investigate if there are less hours actually worked. 3. Compare employee’s benefits, taxes, etc as a percentage of sales and wages compared to last years and this year. 4. Compare direct labor as a percentage of sales with last year and this year. 5. Compare payroll expense as percentage of sale with last year and this year.

Performed By

Audit Program 13 Work Paper Date Index Completed

SUBSTANTIVE TESTS OF ACCOUNT BALANCES

Audit Objectives

Audit Procedures for Consideration 1. Verify that annual salaries and rates are adequately supported and recorded in the payroll system. 2. Verify withholdings are adequately documented, properly authorized and accurately recorded. 3. Review supporting information to determine whether the ending balance reported for Accrued Payroll and Benefits are fairly stated.

Performed By

Audit Program 14 Work Paper Date Index Completed

Audit Program Sampling Detail Sheet

15

Audit Program
Sampling Detail Sheet Define The objectives: The objectives 1. Determine that payroll disbursements are made for authorized work (sample of pay vouchers and time records will be examined) 2. Verify time records for legitimate work hours (items in the sample will be verified) 3. Verify that payroll disbursements were made to actual employees (pay voucher information in sample will be verified) 4. Determine that payroll deductions were withheld from employee checks (for each pay voucher in the sample) a. Deductions to be verified: (1) Federal withholding (2) FICA (3) State tax (4) Health insurance (5) Life insurance (6) Pension (7) Allotments (charity, etc.) (8) Childcare flexible spending deductions 5. Verify EFT transfers processed according to company procedure/policy a. Determine if items in sample were journalized according to company procedure The population: The population 1. The period of time to be covered for pay vouchers, time records, and EFT transfer statements in the sample will be 12-31-2005 through 12-31-2006 2. Ensure completeness: a. Account for the numerical sequence of pay vouchers by reviewing pay voucher logs b. Review each time record in the sample to ensure proper supervisory authorization c. Compare EFT transfer to copies of wire transfer sheets in general accounting

16

Audit Program
Sampling units: The sampling unit a. pay vouchers b. time records c. EFT bank transfer statement d. Personnel records, including wage rates or salary authorizations. e. W-4 and other deduction authorization forms. f. Payroll register. g. Payroll master file. h. Payroll master file changes report. i. Periodic payroll reports j. Various tax reports and forms. 75% of planning materiality: $725,650 x 75% x .01 = $12,698 Tolerable misstatement (Related to materiality – should not exceed auditor’s preliminary judgment of materiality) Determine the Sampling Approach Statistical Statistical or Non Determine the Selection Method Random-number Systematic, every 30 item
th

17

Systematic (every nth item) Other Determine the sample size

Based on the results of the ICQ, observations, preliminary tests and consideration of the fraud control risk factors, controls appear to be effective and the preliminary assessment of control risk will be low.

Preliminary assessment of control risk

With control risk low and inherent risk at Consider the acceptable level of risk moderate the risk of material misstatement is low-moderate. If the risk of material misstatement is lowmoderate and the acceptable level of audit risk is low, then detection risk will be high. See above The expected misstatement is based upon prior year audits, results of other substantive tests, audit judgment and knowledge of changes in accounting and personnel. We do not have information on any of these items on the Kudler Fine Foods internet site. Consider the tolerable misstatement Consider the expected amount of misstatement

The population size is calculated based Consider the population size

Audit Program
on 127 employees that get paid 2 times every month for the time period being audited. This comes out to be 3,048, which is why we will sample every 30th item, for an approximate population size of 102 items. Perform the sampling plan Evaluate the sample results Reach an overall conclusion Document the Sampling Procedure

18

Master your semester with Scribd & The New York Times

Special offer for students: Only $4.99/month.

Master your semester with Scribd & The New York Times

Cancel anytime.